UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-3786
HOMASOTE COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 21-0388986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
932 LOWER FERRY ROAD, WEST TRENTON, NJ 08628
(Address of principal executive office) (Zip Code)
609-883-3300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(D) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(X)Yes ( )No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12-b-2 of the Exchange Act).
( )Yes (X)No
At August 21, 2003, 348,799 shares of common stock of the registrant
were outstanding.
Results of Operations
Homasote Company
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the six months
ended ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- ---------- ----------
Net sales $ 6,104,821 $ 6,387,251 $11,452,462 $12,836,586
Cost of sales 4,922,488 4,516,813 9,148,672 9,555,052
--------- --------- ---------- ----------
Gross profit 1,182,333 1,870,438 2,303,790 3,281,534
Selling, general
and administrative
expenses 1,303,070 1,670,040 2,770,744 3,391,556
--------- --------- ---------- ----------
Operating (loss)
income (120,737) 200,398 (466,954) (110,022)
Other income (expense):
Interest income 622 4,070 1,885 9,387
Interest expense (15,404) (22,216) (30,262) (39,014)
Other income 4,769 3,153 9,547 5,662
--------- --------- ---------- ----------
(10,013) (14,993) (18,830) (23,965)
--------- --------- ---------- ----------
(Loss) income
before income tax (130,750) 185,405 (485,784) (133,987)
expense
Income tax expense --- --- --- ---
--------- --------- ---------- ----------
Net (loss) income $(130,750) $ 185,405 $ (485,784) $ (133,987)
========= ========= ========== ==========
Basic and diluted
net (loss) income
per common share $ (0.37) $ .53 $ (1.39) $ (0.38)
========== ========== ========== ==========
Weighted average basic
and diluted common
shares outstanding 348,799 348,799 348,799 348,799
========== ========== ========== ==========
See accompanying notes to unaudited financial statements.
Homasote Company
BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
------------ -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 247,887 $ 210,091
Accounts receivable (net
of allowance for doubtful
accounts of $46,273 in
2003 and $54,270 in 2002) 2,000,086 2,095,099
Inventories 3,266,206 3,417,984
Deferred income taxes 118,147 118,147
Prepaid expenses and
other current assets 488,253 329,559
----------- -----------
Total current assets 6,120,579 6,170,880
----------- -----------
Property, plant and
equipment, at cost 41,138,900 42,739,488
Less accumulated
depreciation 30,947,730 32,114,396
----------- -----------
Net property, plant and
equipment 10,191,170 10,625,092
Restricted cash 35,038 34,375
Intangible pension asset 682,855 682,855
Other assets 42,670 47,524
----------- -----------
Total Assets $ 17,072,312 $ 17,560,726
=========== ===========
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2003 2002
------------ -----------
(UNAUDITED)
CURRENT LIABILITIES
Short-term debt $ 722,000 $ 597,000
Current installments of
long-term debt 470,002 462,500
Accounts payable 2,298,928 2,138,889
Accrued expenses 446,461 523,992
----------- -----------
Total Current Liabilities 3,937,391 3,722,381
Long-term debt, excluding
current installments 1,158,331 1,395,833
Deferred income taxes 118,147 118,147
Obligations under
benefit plans 6,237,260 6,217,398
----------- -----------
Total Liabilities 11,451,129 11,453,759
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.20
per share; authorized
1,500,000 shares;
issued 863,995 shares 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 14,141,730 14,627,514
Accumulated other
comprehensive loss (2,080,553) (2,080,553)
----------- -----------
13,132,012 13,617,796
Less cost of common shares in
treasury, 515,196 shares in
2003 and 2002 7,510,829 7,510,829
----------- -----------
Total Stockholders' Equity 5,621,183 6,106,967
----------- -----------
Total Liabilities and
Stockholders' Equity $ 17,072,312 $ 17,560,726
=========== ===========
See accompanying notes to unaudited financial statements.
Homasote Company
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND
YEAR ENDED DECEMBER 31, 2002
ADDITIONAL
COMMON PAID IN RETAINED
STOCK CAPITAL EARNINGS
----------- ---------- -----------
Balances at January 1, 2002 $ 172,799 $ 898,036 $15,127,925
Net loss --- --- (500,411)
---------- ---------- ----------
Balances at December 31, 2002 172,799 898,036 14,627,514
Net loss --- --- (485,784)
---------- ---------- ----------
Balances June 30, 2003 $ 172,799 $ 898,036 $14,141,730
========== ========== ==========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
LOSS STOCK EQUITY
----------- ---------- -----------
Balances at January 1, 2002 $ --- $(7,510,829) $ 8,687,931
-----------
Net loss --- --- (500,411)
Net unrealized change in:
Minimum pension liability
adjustment (2,080,553) --- (2,080,553)
-----------
Comprehensive income (2,580,964)
---------- ---------- -----------
Balances at
December 31, 2002 (2,080,553) (7,510,829) 6,106,967
-----------
Net loss --- --- (485,784)
-----------
Comprehensive loss (485,784)
---------- ----------- -----------
Balances at June 30, 2003 $(2,080,553) $(7,510,829) $ 5,621,183
========== =========== ===========
See accompanying notes to unaudited financial statements.
Homasote Company
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
(UNAUDITED)
Cash flows from operating
activities:
Net loss $ (485,784) $ (133,987)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 661,348 653,669
Change in allowance on
accounts receivable (7,997) ---
Gain on disposal of fixed
assets (62,500) ---
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable 103,010 (188,834)
Decrease (increase) in inventories 151,778 (489,632)
Increase in prepaid expenses
and other current assets (158,694) (32,144)
Decrease in other assets --- 425
Increase in accounts payable 160,039 184,262
(Decrease) increase in accrued
expenses (77,531) 116,438
Increase in obligations under
benefit plans 19,862 52,967
Decrease in other liabilities --- (69,562)
---------- ----------
Net cash provided by
operating activities 303,531 93,602
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of
equipment 62,500 ---
Capital expenditures (222,572) (751,430)
(Increase) decrease in
restricted cash (663) 67,559
---------- ---------
(Continued)
Net cash used in investing
activities (160,735) (683,871)
---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 125,000 443,000
Repayment of long-term debt (230,000) (222,500)
---------- ---------
Net cash (used in) provided by
financing activities (105 000) 220,500
---------- ---------
Net increase (decrease)
in cash and cash
equivalents 37,796 (369,769)
Cash and cash equivalents
at beginning of period 210,091 927,686
---------- ----------
Cash and cash equivalents
at end of period $ 247,887 $ 557,917
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 30,262 $ 39,014
========== ==========
See accompanying notes to unaudited financial statements.
NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED JUNE 30, 2003
Note 1. The unaudited financial information of Homasote Company as of
June 30, 2003 and for the three and six-month periods ended
June 30, 2003 and 2002 have been prepared in accordance with
accounting principles generally accepted in the United States
of America for interim financial information and with the
instructions of Article 10 of Regulation S-X. In the opinion
of management, all adjustments (none of which were non-
recurring) necessary for a fair presentation of such periods
have been included. The financial information for the three
and six-month periods ended June 30, 2003 is not necessarily
indicative of the results of operations that might be expected
for the entire year ending December 31, 2003. This unaudited
financial information should be read in conjunction with the
financial statements and footnotes thereto for the year ended
December 31, 2002 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
Note 2. INVENTORIES
The following are the major classes of inventories as of June
30, 2003 and December 31, 2002:
2003 2002
--------- ---------
Finished goods.......$2,657,499 $ 2,777,248
Work in process...... 63,301 52,484
Raw materials........ 545,406 588,252
--------- ----------
$3,266,206 $ 3,417,984
========= ==========
Inventories include the cost of materials, direct labor and
manufacturing overhead.
Note 3. NET LOSS PER COMMON SHARE
Basic net loss per common share has been computed by dividing
net loss by the weighted average number of common shares
outstanding during the respective periods. Diluted net loss
per share is the same as basic net loss per common share since
the Company has a simple capital structure with only common
stock outstanding in 2003 and 2002.
Note 4. DEBT
The Company is party to a loan agreement (the "Agreement") and
promissory note with the New Jersey Economic Development
Authority (the "Authority"). Under the Agreement, the
Authority loaned the Company $4,140,000 out of the proceeds
from the issuance of the Authority's Economic Growth Bonds
(Greater Mercer County Composite Issue) 1996 Series E (the
"Bonds") to be used in connection with specified capital
expenditures described in the Agreement. Interest is charged
at the variable rate of interest due on the Bonds (1.0% at
June 30, 2003 and 1.65% at December 31, 2002).
In connection with the Agreement, the Authority also entered
into a trust indenture with a bank (the "Bank") to serve as
trustee and tender agent for the loan proceeds. The trust
indenture is secured in part by the Agreement and by a direct
pay Letter of Credit facility in the face amount of
$4,209,000, of which $1,628,333 was outstanding at June 30,
2003. Principal and interest are payable monthly to the
trustee in varying amounts through 2006. The Letter of Credit
facility, which was to expire on November 15, 2003, contains
financial and other covenants including minimum tangible net
worth, cash flow coverage, current ratio and maximum
liabilities to tangible net worth (all as defined). The
Agreement was amended effective as of November 14, 2002 (the
"Amended Agreement"). The Amended Agreement further provides
for collateralization of the Letter of Credit facility with
substantially all of the Company's assets excluding real
property. The Company was not in compliance with the minimum
tangible net worth and maximum liabilities to tangible net
worth covenants as of December 31, 2002. This non-compliance
was primarily attributable to the fluctuation in 2002 in
accumulated other comprehensive loss resulting from a
significant increase in the minimum pension liability. On
April 29, 2003, the Company received a waiver of such non-
compliance as of December 31, 2002 from the Bank. As of March
31, 2003 the Company expected to not be in compliance with the
maximum liabilities to tangible net worth covenant. The
Company received a waiver of such non-compliance from the
Bank. On April 29, 2003 the Company received a commitment
(the "Commitment") from the Bank for a prospective amendment
to the definition of equity for purposes of the financial
covenants. In future periods, the definition of tangible net
worth for purposes of covenant calculations will exclude
accumulated other comprehensive income or loss attributable to
the minimum pension liability. The Commitment further
provides for an extension of the Letter of Credit facility
through March 31, 2004, provided the Company is in compliance
with all financial covenants and certain other conditions as
defined. The Amended Agreement, which was further amended on
May 29, 2003 (the "May 2003 Amendment"), revises the
definition of tangible net worth, in accordance with the
Commitment as previously discussed. The May 2003 Amendment
also modifies prospectively the covenants relating to tangible
net worth, cash flow coverage and current ratio. On July 24,
2003 the Company received from the Bank a waiver with respect
to the Company's noncompliance as of June 30, 2003 with the
Cash Flow Coverage Ratio. Other than such noncompliance as of
June 30, 2003, management believes it will be in compliance
with the May 2003 Amendment through March 31, 2004.
The Company has a $1.5 million demand note line of credit
agreement with the Bank which had an expiration date of June
30, 2003. Under the line of credit note, the Company may
borrow up to a specified percentage of eligible receivables
and inventory as defined. Interest is payable monthly at the
Bank's prime rate (4.0% at June 30, 2003) plus 0.25%. As of
June 30, 2003, $722,000 was outstanding under the line of
credit. The unused credit available under this facility at
June 30, 2003 was $778,000. The line of credit note also
provides for an unused line of credit fee of 0.25% per annum.
The note provides for prepayments and advances as required to
satisfy working capital needs. The note is collateralized by
substantially all of the Company's assets excluding real
property. On May 29, 2003 the line of credit note was amended
and restated to provide for an expiration date of March 31,
2004. All other terms of the note continued.
The Company is in the process of seeking replacement financing
for its bank credit facilities which expire on March 31, 2004.
Management believes that cash flows from operations, coupled
with its existing and/or replacement bank credit facilities,
will be adequate for the Company to meet its obligations
through 2004. However, there can be no assurance that the
Company will be able to obtain replacement financing with
similar terms to its existing credit facilities, if at all.
Note 5. The Company is engaged in a dispute with a former energy
supplier regarding the efforts of the supplier to change the
method of pricing. The Company has filed a declaratory
judgment action in the Superior Court of the State of New
Jersey seeking a judgment that the supplier repudiated the
contract with the Company by endeavoring to implement a method
of pricing that was inconsistent with the provisions of the
contract. The defendant has removed the case to the Federal
District Court for the District of New Jersey. The supplier
filed an answer, affirmative defenses and counterclaim against
the Company, seeking damages of $171,000 plus interest and
attorney's fees for breach of contract of the natural gas
sales contract and for breach of the implied obligation of
good faith and fair dealing as well. The matter was tried in
June, 2003. Post-trial submissions were submitted on July
25,2003 and August 8, 2003. The Company believes that the
outcome of this dispute will not have a material effect on the
Company's financial position, results of operations or
liquidity.
Note 6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 requires the
Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets.
The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company
adopted Statement No. 143 on January 1, 2003 and such adoption
had no effect on the Company's financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". This
Statement requires companies to recognize costs associated
with exit or disposal activities when such costs are incurred
rather than at the date of a commitment to an exit or disposal
plan. Previous accounting guidance was provided by the
Emerging Issues Task Force ("EITF") pursuant to Issue No. 94-
3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
Statement No. 146 replaces EITF 94-3. The Company adopted
this Statement on January 1, 2003 and will apply it
prospectively based on future exit or disposal activity.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities". Interpretation
No. 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual
returns or both. Interpretation No. 46 also requires
disclosures about variable interest entities that a company is
not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of
Interpretation No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements apply to the Company for existing entities on
July 1, 2003. The Company has adopted Interpretation No. 46
and such adoption had no effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others". Interpretation No. 45 elaborates on the disclosure
requirements to be made by a guarantor about its obligations
under certain guarantees it has issued. It also clarifies
that the guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee.
Interpretation No. 45 is effective for guarantees issued or
modified after December 31, 2002, and the disclosure
requirements are effective for financial statements for
periods ending after December 15, 2002. The Company has
adopted Interpretation No. 45 and such adoption had no effect
on the Company's financial statements.
FORM 10-Q
HOMASOTE COMPANY
June 30, 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis and statements made elsewhere
in this Form 10-Q may include forward-looking statements about the
future that are necessarily subject to various risks and uncertainties.
These statements are based on the beliefs and assumptions of management
and on information currently available to management. These
forward-looking statements are identified by words such as "estimates",
"expects", "anticipates", "plans", "believes",and other similar
expressions.
Factors that could cause future results to differ materially from those
expressed in or implied by the forward-looking statements or historical
results include the impact or outcome of:
- events or conditions which affect the building and
manufacturing industries in general and the Company in
particular, such as general economic conditions, employment
levels, inflation, weather, strikes, international unrest,
terrorist acts and other factors;
- competitive factors such as changes in choices regarding
structural building materials by architects and builders and
packing products by industrial firms;
Although the ultimate impact of the above and other factors are
uncertain, these and other factors may cause future earnings to differ
materially from results or outcomes we currently seek or expect.
This quarterly report should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS
The Company's sales are derived from building material wholesalers and
industrial manufacturers. Sales during the three months ended June 30,
2003 decreased by $282,430 or 4.4% to $6,104,821, from $6,387,251 in the
three months ended June 30, 2002. Sales for the six month period ended
June 30, 2003 decreased by $ 1,384,124 or 10.8% to $11,452,462, from
$12,836,586 in the six months ended June 30, 2002. The poor sales
performance during the three and six month periods is attributable
primarily to the harsh and unusual weather conditions experienced well
into the second quarter of 2003 in the Northeast and Mid-Atlantic
regions, usually strong markets for the Company's products, and in part,
to the continuation of deteriorated economic conditions in the packaging
industry.
Gross profit as a percentage of sales, was 19.4% and 29.3%,
respectively, for the three-month periods ended June 30, 2003 and 2002
and 20.1% and 25.6%, respectively, for the six-month periods ended June
30, 2003 and 2002. The substantially lower levels of gross profit in
the second quarter and for the first six months of 2003, as compared to
the year earlier period, are due primarily to the underabsorption of the
Company's fixed plant costs, resulting from a severe curtailment of
production to balance inventory levels and the lack of demand for
product. Inventories at June 30, 2003, exclusive of raw materials, are
$2.7 million as compared to $3.2 million at June 30, 2002. Significant
reductions in plant overhead, including the cost of labor and associated
fringe costs and machine repairs, parts and supplies and a 2% increase
in millboard product pricing to customers during the second quarter of
the current year, were offset by the increased price of fuel oil and
natural gas.
Selling, general and administrative expenses as a percentage of sales
were 21.3% and 26.1%, respectively, for the three-month periods ended
June 30, 2003 and 2002 and 24.2% and 26.4%, respectively, for the six-
month periods ended June 30, 2003 and 2002. Selling, general and
administrative expenses decreased to $1,303,070 for the three-month
period ended June 30, 2003, as compared to $1,670,040 for the three-
month period ended June 30, 2002 and to $2,770,744 for the six-month
period ended June 30, 2003, as compared to $3,391,556 for the six-month
period ended June 30, 2002. The overall decrease in the amount of
selling, general and administrative expenses reflects in part the
Company's cost reduction efforts in response to declining sales.
Expense reductions were achieved principally in the areas of
compensation and related fringe costs, sales agent commission costs,
advertising and sales incentives. Additionally, In the second quarter of
2003, the Company realized a gain of $62,500 from the sale of fully
depreciated manufacturing equipment used in its discontinued foam
products operation.
Interest expense on debt decreased to $15,404 for the three-month period
ended June 30, 2003, as compared to $22,216 for the three-month period
ended June 30, 2002 and to $30,262 for the six-month period ended June
30, 2003, as compared to $39,014 for the six-month period ended June 30,
2002. The decrease is primarily attributable to reductions in the
Company's cost of borrowed funds, partially offset by the Company's
increase in net borrowings.
As a result of the foregoing, net losses were $(130,750) and $(485,784),
respectively, for the three and six-month periods ended June 30, 2003,
as compared to net income of $185,405 and net loss of $(133,987),
respectively, for the three and six month periods ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities and bank borrowings are the primary
sources of liquidity. Net cash provided by operating activities amounted
to $0.3 million and $0.1 million in the six-month periods ended June 30,
2003 and 2002, respectively.
Working capital was $2.2 million at June 30, 2003, as compared to $2.4
million at December 31, 2002, a decrease of $0.2 million, due primarily
to the use of funds to finance capital expenditures and for the
replacement of long-term debt with additional short term debt.
Capital expenditures for new and improved facilities and equipment,
which are financed primarily through internally generated funds and
debt, were $0.2 million in the first six months of 2003. The Company has
estimated capital expenditures for the remaining six (6) months of 2003
in the amount of $0.4 million. Such expenditures include the complete
overhaul of a production line mold and other Coe Dryer related projects,
utilizing in part, funds available from the settlement with its
insurance carrier.
Cash flows used in financing activities amounted to $0.1 million in
2003, primarily as a result of the increase in net borrowings of $0.1
million during the period ended June 30, 2003.
The Company is party to a loan agreement (the "Agreement") and
promissory note with the New Jersey Economic Development Authority (the
"Authority"). Under the Agreement, the Authority loaned the Company
$4,140,000 out of the proceeds from the issuance of the Authority's
Economic Growth Bonds (Greater Mercer County Composite Issue) 1996
Series E (the "Bonds") to be used in connection with specified capital
expenditures described in the Agreement. Interest is charged at the
variable rate of interest due on the Bonds (1.0% at June 30, 2003 and
1.65% at December 31, 2002).
In connection with the Agreement, the Authority also entered into a
trust indenture with a bank (the "Bank") to serve as trustee and tender
agent for the loan proceeds. The trust indenture is secured in part by
the Agreement and by a direct pay Letter of Credit facility in the face
amount of $4,209,000, of which $1,628,333 was outstanding at June 30,
2003. Principal and interest are payable monthly to the trustee in
varying amounts through 2006. The Letter of Credit facility, which was
to expire on November 15, 2003, contains financial and other covenants
including minimum tangible net worth, cash flow coverage, current ratio
and maximum liabilities to tangible net worth (all as defined). The
Agreement was amended effective as of November 14, 2002 (the "Amended
Agreement").The Amended Agreement further provides for collateralization
of the Letter of Credit facility with substantially all of the Company's
assets excluding real property. The Company was not in compliance with
the minimum tangible net worth and maximum liabilities to tangible net
worth covenants as of December 31, 2002. This non-compliance was
primarily attributable to the fluctuation in 2002 in accumulated other
comprehensive loss resulting from a significant increase in the minimum
pension liability. On April 29, 2003, the Company received a waiver of
such non-compliance as of December 31, 2002 from the Bank. As of March
31, 2003 the Company expected to not be in compliance with the maximum
liabilities to tangible net worth covenant. The Company received a
waiver of such non-compliance from the Bank. On April 29, 2003 the
Company received a commitment (the "Commitment") from the Bank for a
prospective amendment to the definition of equity for purposes of the
financial covenants. In future periods, the definition of tangible net
worth for purposes of covenant calculations will exclude accumulated
other comprehensive income or loss attributable to the minimum pension
liability. The Commitment further provides for an extension of the
Letter of Credit facility through March 31, 2004, provided the Company
is in compliance with all financial covenants and certain other
conditions as defined. The Amended Agreement, which was further amended
on May 29, 2003 (the "May 2003 Amendment"), revises the definition of
tangible net worth, in accordance with the Commitment as previously
discussed. The May 2003 Amendment also modifies prospectively the
covenants relating to tangible net worth, cash flow coverage and current
ratio. On July 24, 2003 the Company received from the Bank a waiver with
respect to the Company's noncompliance as of June 30, 2003 with the Cash
Flow Coverage Ratio. Other than such noncompliance as of June 30, 2003,
management believes it will be in compliance with the May 2003 amendment
through March 31, 2004.
The Company has a $1.5 million demand note line of credit agreement with
the Bank which had an expiration date of June 30, 2003. Under the line
of credit note, the Company may borrow up to a specified percentage of
eligible receivables and inventory as defined. Interest is payable
monthly at the Bank's prime rate (4.0% at June 30, 2003) plus 0.25%. As
of June 30, 2003, $722,000 was outstanding under the line of credit.
The unused credit available under this facility at June 30, 2003 was
$778,000. The line of credit note also provides for an unused line of
credit fee of 0.25% per annum. The note provides for prepayments and
advances as required to satisfy working capital needs. The note is
collateralized by substantially all of the Company's assets excluding
real property. On May 29, 2003 the line of credit note was amended and
restated to provide for an expiration date of March 31, 2004. All other
terms of the note continued.
The Company is in the process of seeking replacement financing for its
bank credit facilities which expire on March 31, 2004. Management
believes that cash flows from operations, coupled with its existing
and/or replacement bank credit facilities, will be adequate for the
Company to meet its obligations through 2004. However, there can be no
assurance that the Company will be able to obtain replacement financing
with similar terms to its existing credit facilities, if at all.
During the six-month period ended June 30, 2003, there were no material
changes to the Company's contractual obligations or commercial
commitments disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
On April 30, 2003, the Financial Accounting Standards Board ("FASB")
issued Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". Statement No. 149 amends Statement
No. 133 for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities.
Statement No. 149 also amends certain other existing pronouncements.
It will require contracts with comparable characteristics to be
accounted for similarly. Statement No. 149 is effective for the Company
for contracts entered into or modified after June 30, 2003. Management
believes that Statement No. 149 will not have a material impact on the
Company's financial statements.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity". Statement No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of
both liabilities and equity. Management believes that Statement No. 150
will not have a material impact on the Company's financial statements.
INFLATION AND ECONOMY
The Company will continue to maintain a policy of constantly monitoring
such factors as product demand and costs, and will adjust prices as
these factors and the economic conditions warrant. Management believes
the business operations of the Company have been affected by the general
decline in the economy.
OTHER DEVELOPMENTS
The Company's primary basic raw material, wastepaper, is generally
readily available from two suppliers with which the Company has purchase
contracts that expire in 2009. Under the terms of the contracts, the
Company is required to make purchases at a minimum price per ton, as
defined, or at the prevailing market price, whichever is greater. The
contracts require the Company to purchase all of the wastepaper offered
by the suppliers which is generally below the Company's normal usage.
Purchases in the six months ended June 30, 2003 and 2002, aggregated
approximately $254,000 and $360,000, respectively.
The Company is engaged in a dispute with a former energy supplier
regarding the efforts of the supplier to change the method of pricing.
The Company has filed a declaratory judgment action in the Superior
Court of the State of New Jersey seeking a judgment that the supplier
repudiated the contract with the Company by endeavoring to implement a
method of pricing that was inconsistent with the provisions of the
contract. The defendant has removed the case to the Federal District
Court for the District of New Jersey. The supplier filed an answer,
affirmative defenses and counterclaim against the Company, seeking
damages of $171,000 plus interest and attorney's fees for breach of
contract of the natural gas sales contract and for breach of the implied
obligation of good faith and fair dealing as well. The matter was tried
in June, 2003. Post-trial submissions were submitted on July 25, 2003
and August 8, 2003. The Company believes that the outcome of this
dispute will not have a material effect on the Company's financial
position, results of operations or liquidity.
The Company is party to an agreement with a contractor for the
construction by the contractor of an on-site co-generation facility to
supply substantially all of the Company's electricity requirements and
thermal energy for the pulping process. The project cost to the
contractor is estimated at approximately $4.2 million. As presently
contemplated, the Company would lease the facility under an operating
lease with a term of ten years. The construction agreement is subject to
the Company's obtaining construction and environmental permits and
consummation of a definitive leasing agreement. The environmental permit
application is currently under review by the New Jersey Department of
Environmental Protection. There are no assurances that such agreement or
lease will be consummated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to fluctuations
in interest rates as the Company seeks debt financing to sustain its
operations.
The information below summarizes the Company's market risk associated
with its debt obligations as of June 30, 2003. Fair value included
herein has been estimated taking into consideration the nature and term
of the debt instrument and the prevailing economic and market conditions
at the balance sheet date. The table below presents principal cash
flows by year of maturity based on the terms of the debt. The variable
interest rate disclosed represents the rate at June 30, 2003. Changes
in the prime interest rate during fiscal 2003 will have a positive or
negative effect on the Company's interest expense. The Company had
$2,350,333 of debt outstanding as of June 30, 2003. Further information
specific to the Company's debt is presented in note 4 to the unaudited
financial statements.
ESTIMATED CARRYING YEAR OF INTEREST
DESCRIPTION FAIR VALUE AMOUNT MATURITY RATE
DEMAND NOTE $ 722,000 $ 722,000 2004 4.25%
LONG TERM DEBT
INCLUDING CURRENT
INSTALLMENTS 232,500 232,500 2003
477,500 477,500 2004
493,333 493,333 2005
425,000 425,000 2006
---------- ----------
$1,628,333 $1,628,333 1.00%
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13-a-15 under the Exchange Act, the Company
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision
and with the participation of the Company's management including the
Company's Chief Executive Officer along with the Company's Chief
Financial Officer. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective. There have been no material changes in the Company's
internal control over financial reporting or in other factors, which
could materially affect such controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company is from time to time
involved in various claims and legal actions. In the opinion of
management, uninsured losses, if any, resulting from the ultimate
resolution of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
The Company is engaged in a dispute with a former energy supplier
regarding the efforts of the supplier to change the method of pricing.
The Company has filed a declaratory judgment action in the Superior
Court of the State of New Jersey seeking a judgment that the supplier
repudiated the contract with the Company by endeavoring to implement a
method of pricing that was inconsistent with the provisions of the
contract. The defendant has removed the case to the Federal District
Court for the District of New Jersey. The supplier filed an answer,
affirmative defenses and counterclaim against the Company, seeking
damages of $171,000 plus interest and attorney's fees for breach of
contract of the natural gas sales contract and for breach of the implied
obligation of good faith and fair dealing as well. The matter was tried
in June, 2003. Post-trial submissions were submitted on July 25, 2003
and August 8, 2003. The Company believes that the outcome of this
dispute will not have a material effect on the Company's financial
position, results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, as
amended.
31.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, as
amended.
32.1 Certification of Chief Executive Officer under 18
U.S.C. Section 1350,as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - There are no reports on Form 8-K filed
for the three months ended June 30, 2003.
SIGNATURE
Pursuant of the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
HOMASOTE COMPANY
(Registrant)
/s/ Warren L. Flicker /s/ James M. Reiser
Warren L. Flicker James M. Reiser
Chairman of the Board and Vice President and
Chief Executive Officer Chief Financial Officer
Date: August 21, 2003
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED
I, Warren L. Flicker, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Homasote
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation,
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting, and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 21, 2003
By: /s/ Warren L. Flicker
Warren L. Flicker
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED
I, James M. Reiser, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Homasote
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation,
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting, and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 21, 2003
By: /s/ James M. Reiser
James M. Reiser
Vice-President and
Chief Financial Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Homasote Company. (the
"Company") on Form 10-Q for the period ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the
"Report"), I, Warren L. Flicker, Chief Executive Officer of the Company,
hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations
of the Company at the dates and for the periods shown in such report.
Date: August 21, 2003 By: /s/ Warren L. Flicker
Warren L. Flicker
Chairman of the Board and
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Homasote Company (the
"Company") on Form 10-Q for the period ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the
"Report"), I, James M. Reiser, Chief Financial Officer of the Company,
hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations
of the Company at the dates and for the periods shown in such report.
Date: August 21, 2003
By: /s/ James M. Reiser
James M. Reiser
Vice-President and
Chief Financial Officer